Market Overview

Tickers

Articles

Keywords

Pension Fund Sues Wachovia, Wells Fargo (WFC)

A pension fund for Ohio school employees has sued Wachovia, and its current owner Wells Fargo (NYSE: WFC), over losses the fund sustained from investing in the Wachovia's securities lending program. Securities lending programs to pension funds are a large market for Wall Street banks, which has faced questions following big losses in the financial crisis.

The lawsuit, which the School Employees Retirement System of Ohio filed a week ago in federal court in Columbus, Ohio, alleges Wachovia breached is duties to the fund, costing the fund nearly $24 million.

The pension fund has about $9.7 billion in market value and nearly 200,000 members. It began investing in Wachovia's securities lending program in 2004 seeking “a low-risk mechanism” for institutional investors looking to earn “…nominal return…without any additional risk to their securities,” according to the lawsuit.

In late 2009, the SEC said it was looking to shine light on the “opaque” securities lending market, the first time in decades regulators have focused on the multitrillion dollar market.

In the practice, institutional investors, usually pension funds, loan out some securities to brokers, often to feed the brokers' short-selling activities. In exchange for the temporary loan, the funds get collateral, often cash, which is handed over to banks and agents to invest. The idea is that the original security would not have earned any additional income for fund, but by lending it out the fund can add a little on top.

Since the financial crisis exposed flaws in the process, particularly that losses could be much larger than gains, criticism of the arraignment has heated up.

The Ohio fund said Wachovia took the cash collateral and invested it in places it never should have invested it, losing the pension fund millions of dollars. Specifically, the Ohio fund says Wachovia invested in Sigma Finance, the massive structured investment vehicle that spectacularly collapsed in the financial crisis.

The fund wasn't alone in its losses, as many funds suffered when their agents used the collateral to invest in risky pools of securities that ultimately had big losses. During the crisis, banks and other operators also moved to restrict investors from exiting the programs, which has also raised questions from regulators. Many other lawsuits have been filed with funds claiming they lost entire years in profits. The California Public Employees' Retirement System, for instance, reported in 2009 a loss of $634 million for its securities lending program in the year ending in March.